2 cheap shares I bought for dividend income

These two cheap shares have both taken a big hit over the past six months. But I boldly bought both for their high and well-covered dividend yields!

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Since 31 May, the FTSE 100 index has lost 2.2%, but has gained 4.6% over 12 months. For the past six months, the Footsie’s chart looks rather dull, being range-bound between about 6,900 and 7,700 points. But after the index dipped in June, my wife and I went on a share-buying spree. Since 29 June, we’ve snapped up 10 cheap shares: nine from the FTSE 350 and one from the US S&P 500.

Two cheap FTSE 350 shares

We bought stocks that were lowly rated, yet offered attractive dividend yields. So here are two of our new arrivals: one FTSE 100 heavyweight and one modest mid-cap stock.

#1: ITV

One of the first purchases in our recent buying spree was ITV (LSE: ITV). This FTSE 250 firm’s share price has been crushed since it was riding high above 125p last November. Here’s how the stock has performed over six different timescales:

Five days-1.4%
One month7.7%
Six months-37.6%
2022 YTD-36.3%
One year-37.4%
Five years-59.9%

To be blunt, ITV shares have been a horrible hold over periods ranging from six months to five years. Indeed, over the past half-decade, the stock has lost almost three-fifths of its value. Yikes. But these steep price falls have left these cheap shares looking undervalued to me, based on these fundamentals:

Share price70.42p
52-week high127.19p
52-week low62.04p
Market value£2.8bn
Price/earnings ratio6.0
Earnings yield16.6%
Dividend yield7.1%
Dividend cover2.3

Having seen its market value more than halve since November, ITV was relegated from the FTSE 100 to the FTSE 250 in June. But its dividend yield of over 7% a year looks very tempting to me, so we bought ITV’s cheap shares.

#2: Lloyds

After Lloyds Banking Group (LSE: LLOY) shares dipped in June, we bought a modest shareholding for the long term. But the returns below (excluding cash dividends) suggest that Lloyds has been a bit of lemon. For example, it has lost almost a third of its value in the last half-decade. Oops.

Five days-1.1%
One month7.2%
Six months-14.2%
2022 YTD-4.3%
One year-2.3%
Five years-31.5%

But my approach to value investing means I aim to buy into solid businesses when their share prices are weak. And like ITV, Lloyds shares look too cheap to me, according to these numbers:

Share price45.86p
52-week high56p
52-week low38.1p
Market value£31.2bn
Price/earnings ratio7.6
Earnings yield13.2%
Dividend yield4.6%
Dividend cover2.8

For the record, I’m expecting things to get much tougher for both ITV and Lloyds over the next 12 months. Soaring inflation, rising interest rates, slowing economic growth and the war for Ukraine are all nasty negatives for company earnings. And yet I see hidden value in Lloyds’ cheap shares, even though they’ve been a long-term disappointment for the bank’s shareholders.

An earnings yield in the low teens means that Lloyds’ dividend yield is covered almost three times by earnings. This suggests to me that these cash payouts are safe and might even rise over the medium term. And it’s this combination of a decent cash yield and the potential for future capital gains that prompted us to buy these cheap shares!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Cliffdarcy has an economic interest in ITV and Lloyds Banking Group shares. The Motley Fool UK has recommended ITV and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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